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Industrial Policy
Pro or Con?

By January 24, 2024No Comments

After learning of my time at the National Science Foundation in Washington, DC and my service on several corporate governing boards, I was asked recently to share my views on the U.S. having an industrial policy and to contrast the approaches by China and the U.S. I didn’t provide well-reasoned answers, but said I’d like to think about it before responding. Not sure how well-reasoned they are, but here are my thoughts on industrial policy and China’s versus the U.S.’s approaches.

First, let’s agree on what industrial policy means. Generally, the term refers to governments targeting specific industries or technologies for support. Support typically includes incentives, regulations, and interventions, such as providing R&D support.

U.S. industrial policy dates to the nation’s beginning. Alexander Hamilton advocated using tariffs and subsidies to support domestic manufacturing. The Trump administration did likewise, specifically targeting China. The Biden administration followed suit, targeting electric vehicles, advanced computing chips, and semiconductors.

Depending on your age, you might not realize the role Japan played in focusing attention on U.S. competitiveness during the 1980s. In response, President Ronald Reagan appointed a Commission on Industrial Competitiveness, leading to the establishment of the U.S. Council on Competitiveness. An earlier example of a U.S. industrial policy is the Apollo Mission of the 1960s. Another is allowing businesses to use accelerated depreciation in calculating taxable income following World War II to incentivize companies to convert quickly from producing military hardware to producing consumer goods. Throughout the nation’s history, support for and opposition to industrial policy has vacillated. Currently, it’s in vogue.

What are the pros and cons of an industrial policy? Those in favor argue that it’ll stimulate economic growth by strategically investing in specific sectors of the economy. They also note, because other governments subsidize specific industries, it’s necessary for the U.S. to level the playing field by doing likewise. Given our dependence on semiconductors from Taiwan, greater attention has been given to the argument that the U.S. must provide targeted support to ensure a domestic capability to produce products that are critical to national security and health. Another argument for an industrial policy is to support emerging technologies and stimulate innovation; specifically, it’s argued that startup businesses need to be supported until they can “stand on their own legs.” A fifth argument for an industrial policy is based on R&D support; specifically, because of its “spillover effects and societal benefits,” the government should support applied and basic R&D.

Arguments against an industrial policy are based on a) no person or committee is wise enough to pick “winners and losers” accurately in a rapidly changing world, b) “let the market decide, not bureaucrats,” c) the track records of previous choices of industries or technologies to support, d) whatever we do, so will the competition, but they’ll do it faster, e) the short-term focus of the U.S. and its absence of “staying power,” f) decisions being based on politics, not economics, g) the difficulty in weaning certain sectors from a dependence on government support, and h) “the law of unintended consequences.”

Bottom line: based on its history, there is every reason to believe support for and opposition to industrial policies will continue to be cyclical. Currently, every major government has an industrial policy, and the U.S. can’t afford to “sit out” this stage of the cycle. Therefore, every effort should be made to counter each argument against an industrial policy.

The second part of the question relates to decision making within the Chinese government and the U.S. government. In China, an industrial policy can be dictated quickly, whereas in the U.S., an industrial policy emerges very slowly. Given the current political climate, if bipartisan support exists, there’ll be opposition to it within both political parties. Achieving political unanimity on anything appears to be an impossible dream. Furthermore, because of the competitor’s speed, by the time the U.S. agrees on a policy little opportunity exists for competitive advantage.

Despite its shortcomings, I still favor our democratic process. I pray that reason will prevail, and our nation will return to what has been its strength—a shared purpose. United we stand; divided we fall.


Next week: Attributes of an Exemplary Leader—Part I